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In Alaska, small business is big business

With new rules in place to help make sure small, disadvantaged businesses don’t fall victim to predatory partners or themselves mishandle their money, Alaska’s congressional delegation has pledged to fight continued attacks by outsiders on Alaska’s Native-run firms.

U.S. Senators Mark Begich and Lisa Murkowski made the comments in prepared remarks delivered by video to attendees of the National 8(a) conference, under way this week at the Marriott in downtown Anchorage.

“It is frustrating for my colleagues to continue to criticize this program without knowledge of the real benefits it provides across the country,” Begich said, referring to recent efforts by U.S. Sens. John McCain and Claire McCaskill to trim the benefits Alaska Native-run businesses have access to under a government-run business development program.

“I intend to strengthen this program and not stand by as it is continually attacked without merit,” said Murkowski, who, like Begich, was adamant that the business activities of Alaska Native corporations and the businesses they own “play a central role in the economic success of rural communities.”

Small, disadvantaged companies gain access to the perks via enrollment in the U.S. Small Business Administration’s 8(a) program, which is designed to help small businesses succeed and grow. Because they were created to benefit entire communities, Alaska Native and village corporations are allowed to land some very large contracts without competition. And, there are a lot of them.

Currently, 221 companies in Alaska are registered to participate in the 8(a) program, and the lion’s share of them are Native-owned.

Ill-placed criticism?

McCaskill has long believed that too little of the money flows back to the communities Alaska Native 8(a) companies were created to benefit. Coupled with some high-profile scandals alleging, and in some cases documenting, abuse of the program, ANC 8(a) firms have operated under intensified scrutiny in recent years. New rules implemented this year are meant to weed out waste, fraud and abuse and ensure that participating companies are using the program in the ways it was intended.

Like Begich and Murkowski, the highest ranks at the SBA are convinced much of the criticism about ANC’s and how they operate is ill-placed. “Too many people who may have a negative view of ANCs, I firmly believe, [do so] because they don’t understand how the program works,” said SBA Deputy Administrator Marie Johns after touring a factory in Anchorage that manufactures curved-edge traditional Eskimo knives known as Ulus.

The Ulu Factory isn’t an 8(a) firm, but it did benefit through SBA financing when it was ready to expand its operations and build a new facility, and is representative how SBA works to help small businesses and struggling communities in a myriad of ways, Johns said.

While her visit to Alaska introduced her to new foods like seal meat and reindeer sausage, it was through more intimate settings that the Washington-D.C. based bureaucrat said she got a real taste of what Alaskans face, and what they need to succeed. To do this, she traveled to Tatitlek village, an Alutiiq village south of Valdez in Prince William Sound and home to a village corporation involved in the 8(a) program, and also spent time with Native village and business leaders early Wednesday in Anchorage.

“Nothing beats hearing from companies directly,” she said. “I would never presume that in Washington D.C. we have a lock on good ideas.”

Johns believes that in an era when the country is facing the greatest economic downturn since the great depression, small businesses, including those with access to the 8(a) program, have played an essential role in turning things around.

“It has been a major economic engine for business development and job creation in underserved markets,” she said.

In new economy, 8(a) firms evolve

In Alaska, accomplishing this happens in a variety of ways.

For Dillingham-based Choggiung Ltd. it means getting into a different line of business than it has in the past pursued. Where before the construction industry was robust, it’s harder now, said Bryce Edgmon, an Alaska State representative who also happens to be president of Choggiung’s board of directors. Costs are higher and there is increased competition, he said. Now, the corporation is ready to re-enter the 8(a) world by getting into the fire protection business. It just purchased Inland Empire Fire Protection, based in Spokane, Wash., and Edgmon said last month the company received its 8(a) certification.

Inland Empire Fire Protection is one of seven companies owned by Alaskans to become 8(a) certified in May of this year, and one of ten companies to get certified in 2011. In 2010, the Alaska SBA signed on 22 new 8(a) firms. In 2009, it enlisted 27.

For Natives of Kodiak, Inc., a village-level tribal corporation in Kodiak, business growth means expanding its operation to include majority ownership of a clothing manufacturing plant in Puerto Rico, said Michael Kelly, the company’s President and CEO. The apparel business isn’t a new venture for NOK. It has before made clothing – hoods and gloves – for the military. But now it is the employer for workers in Puerto Rico via a joint venture. Gaining access to the federal contract required NOK to be the majority owner in the partnership, and to perform the majority of the work. To do this, NOK had to lease the facility, take on the payroll and accounting, and directly hire at least 51 percent of the plant’s 430 employees.

Critics may not see how hiring staff at a site in the Caribbean Sea improves the lives of Alaska Natives for whom Native corporations were created to serve. But for Kelly, the equation is simple: “Accepting profitable contracts generates profits and allows the corporation to pay dividends to shareholders.”

In November, NOK distributed a $542,000 payout among 854 shareholders, Kelly said, adding that there are additional payments quarterly, through a separate trust fund modeled after the Alaska Permanent Fund that NOK created and invested to be inflation-proof. It has recently paid out at about $13-$14 per share, he said. And villagers in Kodiak benefit in other ways: an Alutiiq museum NOK helps support, archaeological digs for youth, language preservation programs, and promoting the return of historical artifacts to the region.

Critics who think the joint venture program seems merely like a way for smaller entities like NOK to gain easy access to a government flow of cash are wrong, Kelly said. New rules restrict the mentor-protégé relationships to a short-term and only allow the venture to land 3 contracts, which forces businesses to be more selective and in some cases, pass up smaller opportunities hoping for bigger ones. And there is a trend, Kelly said, with the awards by government procurement officers to demand increasingly cheaper products or services.

The price set for the first order of goods is sometimes expected to lessen with each subsequent award, Kelly said, something that can make it tough when costs for fuel and raw materials seem to continuously get more, not less, expensive.

“Is it really realistic to think that manufacturing is going to get cheaper?” he said.

Still, mentor-protégé relationships resulting in joint ventures are valuable. They help small companies build manufacturing capacity they may previously not have had access to, and to turn the ventures into long-term investments.

“This is not any type of pass through entity. This is genuine risk for us,” Kelly said.

As Alaska’s 8(a) firms are in the process of figuring out how to operate under new regulations, passed this spring by the Feds, a new proof of performance requirement is among the change for ANCs. They must now demonstrate how the money they bring in actually makes it back to the communities they serve.

Many are willing to do it, some more happily than others. There is fear that enemies of ANCs and the 8(a) program will misuse the information to launch new attacks, a worry that is certain to come up when the SBA consults with tribes Thursday on how best to go about implementing the new rules.